An Investigation on the Effects of Monetary Policies on Market Liquidity in Zambia from 2016 to 2023

Abstract

This study looks at how Zambian market liquidity dynamics are affected by monetary policies between 2016 and 2023. Using econometric modelling, specifically the autoregressive distributed lag (ARDL) approach, the study examines the immediate and long-term effects of key monetary tools, such as the monetary policy rate (MPR), short-term interest rates (STIR), and long-term interest rates (LTIR), on liquidity. To give a thorough grasp of their impact on financial market activity, fiscal factors like government borrowing and spending are also evaluated. Different short- and long-term trends are revealed by the results. The short-term tightening effect of monetary policy changes was reflected in the short-term negative impact of MPR changes on liquidity. However, in line with earlier research like Banda and Mbewe (2017), decreases in STIR showed a favourable impact on liquidity by encouraging borrowing and investment. However, these variables' short-term effects were fleeting, underscoring the limited immediate significance of monetary policy adjustments in Zambia. LTIR turned proven to be a strong positive predictor of liquidity over the long term, suggesting that stable market activity is supported by advantageous long-term borrowing circumstances. Furthermore, lagged MPR demonstrated a noticeable but delayed effect on liquidity, highlighting the need of steady and predictable monetary policy. However, over time, STIR showed little impact on more general liquidity patterns, highlighting the higher significance of long-term rates in determining market liquidity in Zambia. The study emphasises how crucial it is to balance monetary policy instruments in order to improve liquidity without causing market volatility. In order to support market development and economic growth, Zambian policymakers are urged to concentrate on fostering stable long-term borrowing conditions and upholding predictable monetary policies. These observations advance our knowledge of the efficacy of monetary policy in developing nations and offer practical suggestions for promoting liquidity and financial stability in Zambia.